Mutually at fault

One who seeks justice and equity must come to court with clean hands. This is the principle applied in this case of the spouses Mike and Lina.

The case stemmed from a P350,000 agricultural loan obtained by the spouses from a Rural Bank (the bank) secured by a real estate mortgage on their residential house and 5,229 square meters lot. In order that the bank could grant and approve the loan and mortgage contracts pursuant to R.A. 720 or the Rural Bank Act, the loan was made to appear as several sugar crop loans not exceeding P50,000 each covered by Promissory Notes even if the spouses never really planted sugar cane on any agricultural land because their mortgaged land was a residential lot.

When the spouses failed to pay the loan upon maturity, the bank foreclosed the property with the bank emerging as the highest bidder in the foreclosure sale. Consequently the sheriff executed a certificate of sale in the bank’s favor which was registered with the Register of Deeds.

The spouses however likewise failed to redeem the property within the one year redemption period. Nevertheless the bank entered into an agreement with Mike, through his Atty.-in-fact entitled “Promise to Sell” wherein the bank as Vendor promised to sell, transfer and convey unto Mike as Vendee all its rights and interest in the said parcel of land for and in consideration of P713,312.72 payable by a down-payment of P250,000 and the balance on yearly installment for five years with interest at the prevailing rate. In case of 90 days delay in payment of the yearly installments, the sale will become null and void and of no further force and effect but all payments made shall be returned less interest.

After paying the P250,000 down payment however, the spouses failed to pay the first yearly installment prompting the bank to consolidate title over the property. So the TCT of the spouses was canceled and a new TCT was issued in favor of the bank which likewise took possession of the property.

This impelled Mike and Lina to file an action in court for declaration of nullity of the loan and mortgage contracts, recovery of possession, accounting and damages. They alleged that the said contracts were merely simulated and made to appear as sugar crop loans and therefore null and void. Are they entitled to the reliefs prayed for?

No. Under Article 1345 and 1346 of the Civil Code, simulation of contract may be absolute, when the parties do not intend to be bound at all; or relative, when the parties conceal their true agreement. An absolutely simulated contract is null and void while a relatively simulated contract binds the parties as long as it does not prejudice third persons and is not intended for any purpose contrary to law, moral, customs, public order or public policy.

In this case, it is obvious that the sugar crop loans were relatively simulated contract and that both parties intended to be bound thereby. There are two juridical acts in relative simulation—the ostensible and hidden acts. The ostensible act is the contract that the parties pretend to have executed while the hidden act is the true agreement between the parties. This true agreement may be binding upon the parties if the concealed act is lawful and the essential requisites of a valid contract are present. The loan and mortgage here made to appear as sugar crop loans have all the essential requisites of a contract, but the purpose thereof is illicit as they are intended to circumvent the Rural Bank Act requirement in procuring loans. Consequently, while the parties intend to be bound thereby, the agreement is void and inexistent because its purpose is contrary to law (Article 1409 (1) Civil Code).

The fault for the nullity of the contracts does not lie on the bank alone as the spouses themselves are aware that they are simulated, voluntarily entered into them, and eagerly accepted the proceeds of the sugar crop loans but never planted sugarcane on any property. Accordingly, both are at fault or in pari delicto. So neither party may recover what he has given by virtue of the contract or demand the performance of the other party’s undertaking (Article 1412 (1) Civil Code).

While the Promise to Sell ultimately allows the spouses to recover the property under the void loans, said contract is a separate and independent contract from that of the void loan and mortgage. It did not purport to ratify the said void contract because void contracts cannot be ratified. It did not grant the relief of recovering the property prayed for by the spouses. They are only entitled to reimbursement of the P250,000 down payment as stipulated in said Promise to Sell (Spouses Villegas vs. Rural Bank of Tanjay Inc. G.R. 161407, June 5, 2009).

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